The Weekend Effect in Equity Option Returns
We find that returns on options on individual equities display markedly lower returns over weekends (Friday close to Monday close) relative to any other day of the week. These patterns are observed both in unhedged and delta-hedged positions, indicating that the effect is not the result of a weekend effect in the underlying securities. We find even stronger weekend effects in implied volatilities, but only after an adjustment to quote implied volatilities in terms of trading days rather than calendar days. Our results hold for puts and calls over a wide range of maturities and strike prices, for both equally weighted portfolios and for portfolios weighted by open interest, and also for samples that include only the most liquid options in the market. We find no evidence of a weekly seasonal in bid-ask spreads, trading volume, or open interest that could drive the effect. We also do not find evidence that weekend returns are significantly risker than weekday returns, though the weekend effect does appear stronger when the riskiness of the market portfolio is high. The effect is particularly strong over weekends during which the shortest term options expire, and it is also present to a lesser degree over mid-week holidays. Finally, the effect is stronger when the TED spread is high and past delta-hedged returns are high, which we interpret as providing support for a limits to arbitrage explanation of the weekend effect.
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